After a robust 2023 for ILS, five experts in this space debated the changing role ILS is playing in the wider risk transfer markets, their views on 2024—and the impact on Bermuda of other domiciles.
Q1: HOW WOULD YOU CHARACTERISE THE HEALTH OF THE ILS SECTOR?
Arthur Wightman: 2023, particularly in the primary markets, started in a very positive fashion. The new issuance market in particular was very strong. And when you look at the absolute number of deals, notional amounts, issuances were close to $10 billion in the first half of 2023 and is tracking to be over $14 billion for 2023 as a whole.
Bermuda is a magnet for insurance-linked securities (ILS) and it participated significantly. The secondary market started the year in a different way. Spreads were tightening. And some of the bonds’ valuations were being challenged, particularly coming off the back of Hurricane Ian. As the broader reinsurance markets saw dislocation through the course of the year, ILS caught some of those tailwinds. It has been a strong year for ILS. ILS is bigger than cat bonds and the use of sidecars in Bermuda has also been very strong.
Brad Adderley: The market this year has been phenomenal for ILS. ILS started in different domiciles around the world and then Bermuda took the business from other jurisdictions and grew the market. We then saw a bit of a dip but cat bonds have grown steadily for several years and this year they’ve gone off the chart.
We have also seen a lot more sidecars recently. Bermuda has had a great year, sometimes at the expense of other jurisdictions. I have a feeling that private cat bonds might be down a bit, but the total market is exponentially bigger.
Scott Cobon: As reported, there has been $12 billion year to date in cat bond issuance, and there’s a lot of activity happening at the moment. We hear from the specific deal teams that they’re cautioning issuers that there won’t be the capacity so they are looking for the right price. They’re tempering as we roll into 2024.
I agree we are seeing more sidecars. Sidecars have been tremendously active, especially the last six months. Everyone seems to want one—lots of registrations are happening. There will be a lot of activity as we head into 2024 in that market.
Collateral insurance, the very private and unspoken part of ILS, is worth a mention as we are steadily seeing more actively in this space. We are seeing some green shoots after a tough 48 months or even longer.
Whether issuers can get the capacity they’re looking for, is probably a bit of a question mark, but from a registration perspective, there’s certainly a lot of activity.
Finally, we’re seeing a lot of trapped collateral being released and/or commuted, so the opportunity cost to redeploy that into 2024 is very strong. We’re seeing new money, an increase over prior years in terms of inflows of fresh capacity.
Andre Perez: We started the year with a big appetite for cat bonds but people gradually realised the ILS market is a lot more than just cat bonds. I’ve always been a bit reticent comparing cat bonds to collateralised reinsurance, because to me it’s like comparing apples to oranges. They’re on two different levels of the risk curve.
There’s no doubt that on the collateralised side, investors have taken a bit of a beating in the last couple of years and have gone a bit shy on having to double or triple down. Cat bonds have run relatively clean, which is attractive for investors, even though the returns are not as high as they would be on the collateralised side had the latter run clean.
But, yes, there has been a big increase on the cat bond side, partly fuelled by the capacity that’s available. Because we have had a benign year for 2023, all of a sudden, the pendulum is starting to swing again where we’re starting to see more collateralised re. We’re certainly seeing more sidecars, which is nice. A sidecar is always a very good way for an investor to participate into a specific market condition without having to set up their own reinsurance company.
It’s a healthy market, there’s no doubt about it. Bermuda is still the primary jurisdiction for ILS. Overall we’re still hovering over the $100 billion mark in active deals. I hope we’ll get a little over it, but it’s an asset class a lot of people now know about.
Adam Champion: From the capital advisory side, it’s a little less operational as I get involved when the deals are being considered. They either need legal, financial, or structuring advice. I’m often involved in the early stage, where you’re talking with both carriers and investors, trying to match their respective appetites
Everything said about cat bonds is accurate and not surprising given where the market is. It’s a very natural response off the back of a difficult six-year environment in the property-cat space.
The more interesting area around cat bonds is the transition away from pure property-cat. We’re seeing more and more non-property-cat cat bonds in the market being discussed. A lot more conversations are happening around collateralising other risks and the investor interest and appetite is there.
It’s partly driven by analytics, getting comfortable with the modelling and pricing of the exposures and then getting a broad consensus within the market. We’re clearly seeing a bit on the cyber side, and I think we’re going to continue to see more expansion.
There’s also renewed interest in managing sidecars because of growing investor appetite, and even more interesting is the convergence of sidecars and collateralised re.
We are finding that investors want sidecar-type alignment, but the structure of a fund. Sidecars are often difficult to manage for investors because they are treated like a reinsurance transaction as opposed to a financial investment. Investors want total alignment, with no adverse selection, but in a fund structure.
In the future I think we’ll see more co-mingled funds with sidecar dynamics. Investors don’t want to take risk that the carrier is not, or take a disproportionate amount of any particular risk. One question we hear a lot is “what is their overall risk retention?”.
First Published In Bermuda Finance 2023/24, Bermuda:Re+ILS, January 2024
For further information, please contact:
Brad Adderley, Partner, Appleby
badderley@applebyglobal.com
